Real estate markets perform very differently across the United States. Markets like Los Angeles and San Diego run extremely hot and cold. One year the real estate market might see double digit growth and the next year it might be negative. On the other hand, some markets, like Chicago, ease up and down like a rolling tide. Real estate investors should understand how market dynamics effect the way they invest.
Real Estate Market Volatility
First, consider a highly volatile market like Los Angeles. Over the past 20 years, it experience numerous years of both double digit growth and negative growth. As an investor, holding on to an investment for too long usually has immediate consequences. For example, an investor who purchased a home in 2013 in Los Angeles would have experience appreciation of 13% in 2014; however, if that investor stayed in the market they would have then lost approximately (4%) of the value in 2015. Additionally, if that investor optimistically hoped the market would rebound they would have lost another (25%) in 2016.
Strategies for High Risk Real Estate Markets
In highly volatile markets, the best strategy appears to be get in early and get out early. Investors that come into these markets early can take solace in the future double digit growth potential. The longest down market in Los Angeles occurred from 1991 – 1996, this period was follow by 10 years of mostly double digit growth. An early entrant into the market may have experience a year or even two of slightly negative growth, but they would have been able to experience a full growth cycle.
In contrast, investors would be better off exiting the market before they suspect a peak. While they might miss out on a year or even two years of growth, they might avoid taking substantial losses. These markets can turn so suddenly that a double digit growth year could be followed by a year of negative growth (e.g., 2014, 2015). That negative growth year could be followed by an even more negative year. Keep in mind that selling in a down year could be challenging, so the longer an investor waits, the more their property values will suffer.
In high growth markets investors, need to keep their eye on market dynamics. Don’t be afraid to take profits early and focus on the general market trends. When employment slows, housing inventory starts to build, or the time it takes to sell a home increase, it might be time to start marketing the investment property. Real estate markets move much slower than the stock market, but investors should try to avoid being caught asleep at the wheel.